People are still calling the bottom in real estate (after 16 months, you’d think people would have more restraint), but with the recession in full swing everywhere (for the first time since record keeping began, all 50 states and D.C. saw unemployment rise in December), that’s not going to happen any time soon.
Apartments are often the least affected investment properties in recessions, but rental rates are about to experience declines in most markets (if they aren’t already experiencing declines). If people can’t afford their rent, they don’t renew leases. They move to smaller units. Or they move in with friends/family. Or they move from class A properties to class B properties.
Barry Ritholz at The Big Picture spends some time on the topic by citing a weekend piece in the New York Times. The gist of the story: rents are down precipitously, and rent is probably down more than people think.
Looking at the nation as a whole, Marcus and Millichap forecasts falls in occupancy in every market they track. This doesn’t mean all apartments will see rental rate declines, but it means landlords are going to have a tougher time commanding the prices they’ve asked in the past.
Certain properties will remain in demand, of course. Class B assets are some of the safest apartment plays in a recession because of renters who downgrade from their pricy, new Class A units. Tenants at Class B properties also tend to have better credit and to be more reliable than renters at Class C properties. Properties with smaller units are also attractive: renters may pay more per square foot, but they pay less overall.
The other investment alternative is to look for properties that are under-rented. Market rent is just an average, with some properties below that rate and some above. Properties that are below market rent may still see rent growth, even in a recession.
